Newegg Gets Scrambled in Court

Delaware U.S. District Court Judge Leonard Stark just handed online retailer Newegg, Inc., a substantial defeat in the company’s aggressive campaign against “patent trolls.” Rhetoric that plays well in the press apparently does not hold up so well in court.

Lee Chen, General Counsel of Newegg, is incensed with businesses that defend their patents, calling them “patent trolls.” In an interview with Joe Mullin of ArsTechnica he said:

[Trolls say] Give us your money or we will shut you down!" Screw them. Seriously, screw them. You can quote me on that.

Newegg has decided not to settle patent infringement lawsuits, preferring to fight; Chen claims “…settlement only feeds the beast.”

He also claims

Patent trolls have largely stopped suing Newegg because we can assure them and their lawyers that suing Newegg is a money-losing proposition, certainly compared to suing companies who settle serially. Our message: Sue Newegg, lose money. I’m trademarking that slogan.

IPNav’s client Data Carriers, LLC, has not been intimidated by Lee’s blustery rhetoric and threats.

Data Carriers owns US Patent 5,388,198, titled “Proactive presentation of automating features to a computer user,” has a priority date of April 16, 1992 and has been cited almost 100 times by a number of sophisticated companies. Data Carriers filed suit against Newegg in the Delaware District Court for infringement of the ‘198 patent. In keeping with their “anti-patent troll” campaign, Newegg refused to negotiate or take a license to the ‘198. Instead they filed a counterclaim, seeking not only the usual declaratory judgment of non-infringement and invalidity, but also charging Data Carriers AND its licensing advisor, IPNav, with a dubious at best “abuse of process” claim.

As “evidence” for how IPNav “abuses” the court system, Newegg attached a copy of an article in Corporate Counsel magazine quoting IPNav CEO Erich Spangenberg as saying “sue first, ask questions later.” In fact, as a general rule, it is NOT IPNav’s policy to advise our clients to sue first – generally we believe in negotiation. But against someone like Chen – who has publicly stated that he will not take licenses to IP even if Newegg is practicing the IP and will not settle patent infringement lawsuits – there is no point in opening with negotiation.

In the counterclaim, Newegg made the attempt to lump together a variety of separate entities – Data Carriers, two other companies, SFA Systems, LLC and TQP Development, LLC, together with IPNav, Erich Spangenberg, and IPNav’s Co-Chairman, David Pridham as “collectively involved” in a business model that includes among other things seeking “quick settlements” that reflect “nuisance value.” There was absolutely no basis in fact for these assertions—this is pure fantasy on the part of Newegg that claims to be against litigation abuse—albeit apparently not on their part.

As Newegg is learning in court, IPNav is an advisory firm – not an “agent” – of our clients, and the IPNav business model is most definitely NOT based on settling for “nuisance value.” It’s based on getting a fair return for the value of the intellectual property of its respective clients.

Additionally Newegg claimed it was somehow “abusive” for Data Carriers to seek a settlement after filing a lawsuit, and for offering a covenant not to sue for the ‘198 patent at auction.

Judge Leonard Stark granted a motion filed by Data Carriers and IPNav asking to dismiss Newegg’s counterclaim of abuse of process. In addition to rejecting the counterclaim, Judge Stark rejected including IPNav as a defendant in the counterclaim.

The judge further rejected Newegg’s claim that Data Carriers’ actions – enforcing a presumptively valid patent, making an attempt at settlement, and offering settlement via auction – are abusive.

There are several messages that Newegg (and others – such as Rackspace) should learn from this:

It is not abuse to enforce patents, whether in court or through offering a license. A patent that has been granted by the patent office is presumed to be valid, and enforceable.

It is not some form of “abuse” to advise a client on patent monetization – which is what IPNav does. Suing IPNav – an advisory firm – makes as much sense as suing a law firm that advises a client on legal strategies or litigation.

The Court confirmed that IPNav is not a patent owner (and therefore cannot be a patent troll), and therefore cannot be sued over issues relating to the patents that are owned by our clients.

Newegg’s counsel made Lee Chen’s high-pitched arguments in court, which read like countless conspiracy theories. The judge let Newegg make its statement, but ruled that nothing that Data Carriers did is precluded by law, and the courtroom is not the appropriate place for Newegg to address its issues with the broader patent system.

Perhaps Newegg will also learn that instead of making blanket statements that it will “never settle with patent trolls” it should consider each case of alleged infringement on its own merits. In their pursuit of their quest to end litigation abuse for baseless and frivolous assertions in litigation, we trust Mr. Chen will be sending a check our way.